Friday, January 14, 2011

Retirement Legislation Part One

Virginia’s two political parties have sharply contrasting approaches in regard to pension legislation. The following three bills are the most significant bills from the Republican side of the aisle.

Two Virginia Beach Republicans, Delegate Tata and Senator Wagner, have submitted companion bills (HB 1784 and SB 861). These bills permit “any locality or school board to establish a defined contribution retirement plan in lieu of any other retirement plan, for employees hired after such plan is established.” Stated more simply, any locality could choose not to be in VRS. The consequence of this bill would be severely reduced retirement benefits for teachers and other local employees.

Two central Virginia Republican Senators , Stosch and Watkins, have submitted the Governor’s bill, SB 1008. This bill “allows political subdivisions that participate in the Virginia Retirement System to establish a … defined contribution plan.”

The adequacy of the retirement benefit generated by a defined contribution plan to meet the needs of dedicated school board employees in their final years is questionable. PricewaterhouseCoopers, in the 2008 JLARC study of Total Compensation for State Employees, found that “after 30 years of service, the defined contribution plan would have approximately 52 percent of the value of the current defined benefit plan. With Social Security, the defined contribution plan would also provide an income replacement of approximately 29 percent less than the current defined benefit plan.”

A Bedford County teacher, for example, who retires after 30 years experience in the current VRS pension plan will receive an annual benefit of $26, 223 (30 x 01.7% x $51,417). Using the PwC analysis, she would receive an annual benefit of $13,636 had she been in the defined contribution plan.

The Employee Benefit Research Institute found that fewer than 50% of workers in defined contribution plans had more than $25,000 saved. A quarter of workers had put away next to nothing.

In SB 1008, Local employers would retain the option of paying member retirement contributions on behalf of their employees participating in the Virginia Retirement System.

The Governor indicated that he will submit legislation to do the following:

What will happen if HB 1784 and SB 861 pass? I am unclear on what they mean. Does that mean that local governments can create their own defined contribution plan only for new hires? What would happen to VRS if there were large numbers of school systems or employees who were no longer paying into it? I am getting very nervous about this. VRS is my retirement plan. I contribute to a 457 and a 403b, but there is no way that I can ever retire if VRS folds. Is that a real threat or am I being overly paranoid?